Jamie is considering leaving her current job, which pays $75,000 per year, to start a new company that develops applications for smart phones. Based on market research, she can sell about 50,000 units during the first year at a price of $4 per unit. With an annual overhead costs and operating expenses amounting to $145000. Jamie expects a profit of 20 percent. This margin is 5 percent larger than of her largest competitors, Apps. Inc.
a. If Jamie decides to embark on her new venture, what will her accounting cost be during the first year of operation? Her implicit costs? Her opportunity cost?
b. Suppose that Jamie’s estimated selling price is lower than originally projected during the first year. How much revenue would she need in order to earn positive accounting profits? positive economic profit?
a) Accounting costs = Annual overhead costs and operating expenses = $145000; Implicit costs = $75,000 Opportunity cost includes both implicit and explicit costs: $145,000 + $75,000 = $220,000; b) As accounting profits = Total revenue – accounting costs to earn positive accounting profits, the revenues per year should be greater than $145,000. Economic profit = Total revenue – opportunity costs. So to earn positive economic profits, the revenues per year must be greater than $220,000.